Speaking at a luncheon meeting at the Harvard Club, Jalan claimed, "The fiscal deficit is more a domestic issue. From the external point of view, the current account deficit is what is important" and therein India showed growing strength. Jalan, a professional economist with varied experiences including adviser to the World Bank, said India had a current account deficit that was only 1.7 per cent of the GDP, one of the lowest in the world. While conceding that the fiscal deficit, at 5.6 per cent of GDP, was high, he reiterated that its significance was "overplayed" by investors and officials.

According to Jalan, the distinction between fiscal deficit and current account deficit has remained blurred because of an older economical model, thePolack model, in which the two are identical. However, today the current account, in simple terms, denotes the difference between a country's imports and exports whereas the fiscal deficit refers to the difference between what a country's government earns and spends.

He also said there was no apparent correlation between high fiscal deficits and financial crises. East Asian countries did not have high fiscal deficits, yet have undergone extensive damage to their economies while Latin American countries such as Brazil have a history of fiscal deficits and their economies are also in crises, Jalan noted.

Jalan is scheduled to join finance minister Yashwant Sinha and finance secretary Vijay Kelkar for the International Monetary Fund (IMF)/World Bank meetings in Washington. At the meetings, India will reportedly seek a consensus on restricting short-term movements of global capital. India, however, has remained unaffected by the financial crisis that originated in east Asia, largely because it has retainedcontrols on short-term flows of foreign capital.

The RBI governor said a feature of India's policies has been its "financial conservatism" and its strong aversion to risk. These policies, including the controls on capital movements, were at one time frustrating to bankers and investors but are now being "seen in positive light," he added.

Jalan also said the RBI had successfully defended the rupee against speculators and by raising the bank rates early this year added about $3 billion in foreign exchange reserves. In fact, the current forex reserves are higher than a year ago, he said.

The key issue, Jalan said, was in keeping a moving interest and exchange rate regime, not a pegged one. He also cited key economic indicators to outline growth. While the good monsoons augured well for agriculture, he conceded that industry had seen a downturn and exports remained a major problem.

The meeting was organised by the India-America Chamber of Commerce (IACC) and sponsored by the State Bank of India(SBI).